Ambulatory surgery centers (ASCs), freestanding facilities that specialize in surgical and/or diagnostic procedures that do not require an overnigh stay, have grown at unprecedented rates in recent years. According to MedPAC, the number of Medicare-certified ASCs increased at an annual rate of 6.7%, from about 3,600 in 2002 to nearly 5,000 in 2007. This growth has been accompanied by substantial increases in expenditures on ASC services. Medicare payments to ASCs jumped from $1.9 billion in 2002 to $2.9 billion by 2007. Over this time period, ASC spending per beneficiary rose more than 8% per year. The growth of ASCs can be attributed to a myriad of factors. Among these are technological advances in anesthesia and the development of less invasive procedures; physicians' desire to have greater control over management decisions; ease in scheduling stemming from the absence of emergency cases; ownership of ASCs as an avenue for physicians to augment their income; and relaxation of certificate of need laws. Medicare substantially revamped the payment system for ASCs in January 2008, moving from nine broad payment categories to more than 2400 groups. Surprisingly, this new ASC payment schedule was established without critical data - reliable and accurate estimates of costs. Thus, lacking accurate data on costs, it is unknown whether payments under the new reimbursement system are more in alignment with the costs of producing each surgical service. Empirical evidence documenting the costs of performing outpatient surgery in an ASC is nonexistent. Considering that ASCs have become the dominant provider of outpatient surgical and certain diagnostic procedures, it is critical to evaluate costs and payment rates. This R21 application addresses this significant gap in knowledge. First, we will estimate cost functions for ASCs using panel data spanning the years 2004 thru 2012 from Pennsylvania, the only state that collects operating expenses for ASCs. Second, we will use our estimates to compare production costs and Medicare reimbursements for the most commonly performed outpatient surgical procedures. Because of its exploratory nature, this project is well suited for the R21 mechanism. No prior research has attempted to estimate the costs of procedures performed in ASCs and then compare procedure costs to Medicare reimbursement.